Given that there are tax concessions associated with investing via the superannuation system, the Federal Government has established limits on certain types of contributions – these are known as “contribution caps”.
The contribution cap limits are the amount that can be contributed for a member each financial year (i.e. 1 July X0 to 30 June X1).
Contributions can be divided into two types:
- Concessional contributions
- Non concessional contributions.
Concessional contributions include superannuation guarantee contributions (SGC) and salary sacrifice contributions.
If you have worked in Australia it is likely your employer has made SGC payments on your behalf and you may also have chosen to make additional salary sacrifice contribution.
For the 2015/16 tax year, the current concessional contribution limits are as follows:
- $30,000 cap for anyone aged 48 or under as at 30 June 2015;
- $35,000 cap for anyone aged 49 years or over as at 30 June 2015.
If you are working overseas and you have not earned any Australia sourced personal exertion income, it is likely that your employer is not making any SGC contributions on your behalf. Except in special circumstances, it is also likely that it will not be beneficial for you to make personal contributions to superannuation and claim a tax deduction.
Based on experience, the main type of contributions that expatriates make is non concessional contributions.
Many Australian web sites describe non concessional contributions as ‘after-tax’ contributions on the basis that concessional contributions are ‘before-tax’ contributions, but this is very misleading for expats. You do not have to have paid tax on money you have received for it to qualify as a non concessional contribution.
Non concessional contributions include:
- personal contributions for which a tax deduction is not claimed in Australia;
- spouse contributions in respect of the receiving spouse;
- the tax free part of an amount transferred from a foreign super fund;
- contributions in excess of the concessional contributions cap; and
- some amounts transferred from reserves.
Based on the above definition, expats who have earned money overseas and wish to use the savings to top up their superannuation can make a non concessional contribution irrespective of whether they have paid tax on the income overseas or not.
A non concessional contribution is simply a contribution for which a tax deduction has not been claimed through the Australian tax system (either by you or your employer).
The non concessional caps are simply 6 times the based concessional cap. From 1 July 2014 the non concessional contributions are subject to:
- a yearly cap of $180,000 for members 65 years of over but under 75; or
- $540,000 over a three-year period for members under the age of 65. The caps are indexed annually.
The so called ‘three year bring forward rule’ which allows you to make three years of non concessional contributions during a three year period can actually be quite beneficial for expats in that it is possible to make a full $540,000 contribution in one day … and then no further contributions during the three year timeframe to which the limit applies.
This can be of significant benefit to a repatriating expat who has saved up a lot of money outside the superannuation system or has sold overseas assets and wants to substantially increase his or her superannuation investments.
If the returning expat wanted to invest say $720,000 in super, they could do so by contributing say $180,000 before 30 June of one tax year and then contributing a further $540,000 on the first day of the next tax year.
If the returning expat needs to invest more than $720,000 in super, then they would have to consider making contributions over a longer period of time.
The application of the contribution limits highlight the need for significant forward planning, particularly if you have been overseas for a long time and you want to re-balance a significant portion of your personal wealth in favour of the super system.